Beginning in the 1970s, the federal government pursued a decades-long program of encouraging home ownership. In so doing, the "feds" implemented policies designed to encourage lenders to assist potential buyers in realizing the "American Dream." As with most government intrusions into the free market, the unintended negative effects of these policies were not immediately visible.
To the contrary, the evidence appeared to show a broad expansion of home ownership was a good thing for all those concerned. Banks made more loans so their balance sheets were up. Buyers, whose credit was previously considered too risky, were thrilled that funds were suddenly available. Builders rushed to hire workers so they could keep up with the perceived need for more housing. And existing homeowners jumped at the chance to refinance at artificially lower rates.
The housing sector became the one area of the economy where it appeared nobody could lose money. Hosts on late-night infomercials informed the novice they could become millionaires overnight by "flipping houses." The practice became so popular that whole television networks were dominated by programming aimed at those involved in this seemingly failsafe endeavor. Like all things that appear to be "too good to be true" the government-created housing bubble burst and sent the American economy into a tailspin.
Smart investors will learn the lesson offered by economist, Peter Schiff, who draws an analogy between the artificial housing boom and a circus that has come to town for a limited time. In the analogy, Schiff poses a scenario in which a restaurant owner mistakenly surmises business is up permanently when, in reality, the restaurant is simply more crowded with circus performers in town temporarily. Based upon his faulty understanding, the restaurant owner hires more staff. Subsequently, he is distraught to learn the boom was short-lived - an illusion - when the circus leaves town. When business naturally returns to its pre-circus level, the owner faces the choice of dismissing his new workers or operating at a loss.
In the housing sector, economic actors were similarly misled by a series of well-intentioned government policies. Then, rather than allowing the free market to work out the disorder they created, Washington exacerbated the situation by implementing a string of stimulus and bailout packages. In Schiff's scenario, this would be like giving the restaurant owner a low interest loan (i.e. a bailout) so he can keep staff he does not need, or worse yet, inflating the currency so he can pay back his debts more easily. In the end, both actions worsen the eventual reckoning by further deforming the capital structure.
With a profound understanding of the mischief caused when government interferes with the free market, renowned libertarian economist, Milton Friedman, stated that market forces are always stronger than whatever measure government tries to put in place to direct them. In their conceit, Washington has unwisely sought to use the American economy as a tool for social engineering. As a result, precious resources have been misallocated causing economic chaos both at home an abroad. The fault in this case is shared by both Democrats and Republicans across five presidential administrations. The question is whether our present leaders have learned anything from the effects of their predecessors' ill-advised tampering.
Kevin Ritter is a local small business owner and member of the Marietta 9-12 Project. He has lived in the Mid-Ohio Valley for the past 10 years.
